Banks Brace for Accounting Change

Banks stocks have rallied since dipping to their March lows, but new accounting rules set to take effect at the end of the year could weigh on their balance sheets.
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Banks stocks have rallied since dipping to their March lows, but new accounting rules set to take effect at the end of the year could weigh on their balance sheets.

The Financial Accounting Standards Board, or FASB, earlier this month quietly amended FAS 140, effective at the end of the year, eliminating qualified special purpose entities, or QSPEs. If you thought mark-to-market accounting changes had an effect on the banks, hold onto your hats.

The special purpose vehicles allow banks to stash things like asset-backed securities and other unwanted assets, reducing the amount of reserves they need to hold. The QSPEs also are a great way to hide losses.

Citigroup

(C) - Get Report

had $822 billion in QSPE exposure last year, according to its annual report. That's tops among the four largest banks.

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"While these proposed standards have not been finalized, they may have a significant impact on Citigroup's consolidated financial statements," Citi said in the report.

Surprisingly,

JPMorgan Chase

(JPM) - Get Report

is second among the big four, with a whopping $640 billion. JPMorgan said in its annual report that bringing these items back on the balance sheet could reduce its Tier 1 capital ratio by 80 basis points.

Bank of America's

(BAC) - Get Report

QSPE exposure was a comparatively modest $81 billion and

Wells Fargo

(WFC) - Get Report

rounded up the group of four with $39 billion. BofA warned that eliminating QSPE's "may result in an increase in outstanding loans ... higher provision and allowance for credit losses."

None of the banks would comment. Of course, they all sent letters to FASB saying they were against it.

Maybe this isn't anything to worry about.

The New York State Banking Department isn't. In its letter to FASB before the changes to FAS 140 were adopted, it said, "The board should disregard arguments about the expected impact the proposal will have on regulatory capital, since regulators have the ability to revise their capital requirements."

So true. If we don't like what transparency brings, we can change the rules. Just like what happened to mark-to-market.